Could ASX 200 iron ore shares be heading for more pain?

S&P/ASX 200 Index (ASX: XJO) iron ore shares have taken a bit of a beating in recent months.

Over the past six months, the Rio Tinto Limited (ASX: RIO) share price has dropped 22%, the BHP Group Ltd (ASX: BHP) share price has declined 22% as well, the Fortescue Metals Group Limited (ASX: FMG) share price has fallen 32% and the Champion Iron Ltd (ASX: CIA) share price has dropped 35%.

It’s difficult for resource businesses to rise when the relevant commodity price is falling.

What’s going on with the iron ore price?

Reporting by the Australian Financial Review showed that the iron ore price continues to fall. The newspaper reported on a weekend note by S&P Global Commodity Insights which attributed a decline at the end of last week to “poor liquidity as most market participants showed a cautious buying behaviour”.

S&P also noted that the decline of the iron ore price reflected “poor margins” at Chinese steel mills.

The newspaper quoted TD Securities, which suggested that Chinese manufacturing is under pressure “on trade intensifies and amid renewed COVID flare-ups across the country. Additionally, property-sector weakness shows little sign of abating.”

However, TD Securities referred to “firmer steel demand”, which will “offer some solace” and that “autos production is another bright spot.” But, more lockdowns in some cities are expected to pressure the non-manufacturing purchasing managers’ index.

Liberum Capital said in a note that the outlook isn’t promising considering the Chinese real estate sector is going through troubles yet there is “relatively robust demand for commodities.”

In the note, Liberum Capital said:

We do not believe that this apparent versus actual demand mismatch is healthy or sustainable. Trade/price correction risk is building.

Is this a good time to invest?

Liberum Capital certainly doesn’t think so, with a selling rating on both BHP and Rio Tinto.

The broker UBS currently has a neutral rating on BHP, with a price target of $35.50. This rating was based on the risk that iron ore prices could keep falling

Macquarie has an outperform rating on BHP, with a price target of $45, though it did acknowledge that the wet weather could hamper production.

It’s a similar story with Rio Tinto. UBS has a neutral rating, with a price target of $90. However, Macquarie’s rating is also neutral on Rio Tinto, with a price target of $95.

On Fortescue, Macquarie rates the ASX 200 iron ore share as underperform, with a price target of just $14.50. Macquarie thinks that the iron ore price will be subdued over the next year or two.

Foolish takeaway

Time will tell what happens with the iron ore price. There could be a positive surprise in China.

Also, iron ore has been cyclical in the past – just look at 2016. It’s impossible to predict if or when the iron ore price could go back above US$100 per tonne, but I think times of heightened pessimism could prove to be the opportunistic time to look at these ASX 200 iron ore shares.

The post Could ASX 200 iron ore shares be heading for more pain? appeared first on The Motley Fool Australia.

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More reading

• Why Brainchip, Bubs, EML, and Fortescue shares are falling today
• The BHP share price went backwards in October. Time to pounce?
• Why I chose to buy Fortescue shares over BHP
• Brokers say there’s more pain ahead for the Fortescue share price
• Why Brainchip, Calix, Fortescue, and ResMed shares are sinking

Motley Fool contributor Tristan Harrison has positions in Fortescue Metals Group Limited. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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